Naspers’ R900 billion value gap

If Naspers held on to its full 33.2% Tencent share and reinvested dividends from the Chinese giant, it would have been worth R2.14 trillion – R900 billion more than what Naspers shareholders currently have.

The company was founded as Die Nasionale Pers – aka Naspers – in 2015 as a publishing company. Its first titles were Die Burger newspaper and De Huisgenoot magazine.

It entered the television and Internet markets in the eighties and nineties through M-Net, Mweb, and MultiChoice.

Naspers’ big break came in May 2001, when it acquired a 46.5% interest in Tencent, which operated an instant messaging platform in China called QQ.

Tencent grew into one of the world’s largest Internet and technology companies and is the global leader in the video game industry.

It surpassed a market value of US$500 billion in 2018 – the first Asian technology company to cross this valuation mark.

Its market cap peaked at over $900 billion in February 2021 but pulled back significantly following a crackdown by the Chinese government on large tech companies.

Even though its share price plummeted over the last year, Tencent, with a market cap of around $366 billion, is still more valuable than tech behemoths like Samsung, Alibaba, Oracle, and Nividia.

Naspers’ share in Tencent was reduced from 46.5% to around 33.2% when the Chinese giant was listed on the Hong Kong Stock Exchange on 16 June 2004.

In March 2018, Naspers announced that it would sell 2% of its Tencent holding for $10.6 billion to reinforce its balance sheet and invest in its classifieds, online food delivery, and fintech businesses.

The market did not like what it saw. Naspers achieved tremendous growth between 2003 and 2018, but the share price stagnated following the Tencent share sale.

There was also a growing discount to net asset value (NAV), with many shareholders calling for Tencent to be unbundled to unlock value.

The market was unwilling to pay the full value for Tencent because Naspers’ management was destroying shareholder value in the rest of the group.

There was no trust that Naspers’ leadership would be able to buy better assets than Tencent with the money it raised from selling Tencent shares.

Naspers did not entertain the idea of a Tencent unbundling. Instead, it unbundled Its internet assets outside of South Africa into a new company called Prosus.

Prosus was listed on Euronext Amsterdam in September 2019, but it did little to reduce the Tencent discount and unlock value for shareholders.

In another attempt to narrow the value gap between Naspers/Prosus and their stake in Tencent, the two companies did a deal which set up a cross-holding structure.

Prosus bought 45% of Naspers shares, bringing its ownership in Naspers to 49%. Naspers owned around 57% of Prosus and kept voting control.

The creation of Prosus and the cross-holding structure failed to unlock value. Investors also slated the $144 million transaction fees for the share swap.

The reality was that the market lost confidence in management. Naspers and Prosus were criticised for poor capital allocation and high running costs.

In the latest attempt to unlock value, Naspers and Prosus have embarked on a share repurchase programme.

The programme is designed to increase net asset value per share, taking advantage of Prosus’s and Naspers’s trading discounts to their underlying net asset value.

The repurchase programme is open-ended and will run as long as elevated levels of the trading discount to the group’s underlying net asset value persist.

The market met it more favourably, with Naspers’ share price jumping by over 20% on the news.

Naspers versus Tencent

Many analysts and fund managers have slated Naspers for destroying shareholder value through poor management decisions.

One of Naspers and Prosus’ biggest critics is Ranmore Fund Management founder Sean Peche.

Peche said Prosus’ management did not use the money it received from selling 2% of its Tencent stake productively and that keeping cash away from its management team was good.

It raises the question of what would have happened if Naspers had done absolutely nothing after it bought a 46.5% interest in Tencent two decades ago.

If Naspers held on to all its Tencent shares and reinvested all dividends into Tencent, its stake would now be worth R2.14 trillion.

If it only held onto its 33.2% Tencent stake, paid out part of the dividends to shareholders, and kept some for other purposes, its stake would still be worth R2.03 trillion.

The value Naspers shareholders currently have, following the creation of Prosus, the MultiChoice unbundling, and share buybacks are only R1.24 trillion.

It means Naspers shareholders would have been far better off if the company had done nothing since its Tencent acquisition.

Selling part of its stake in Tencent to acquire new Internet companies, creating Prosus, and the Prosus/Naspers share swap did not create shareholder value.

The only real value-creators for Naspers shareholders were the unbundling of MultiChoice and the recent share buyback programme.

Naspers share price

Prosus share price